Antero Will Benefit From Increased LNG Exports Starting Next Year

Sector Strategist

Stephen Ellis

Antero Resources produces natural gas from the Marcellus and Utica shales in West Virginia and Ohio. It is concentrating on areas with a relatively high liquids content; natural gas liquids and condensate account for about 35% of its production. That means the firm is well positioned to capitalize on rising prices for ethane, propane, and butane. Overseas demand for these petrochemical feedstocks is robust, and Antero benefits disproportionately as an anchor shipper on the Mariner East 2 pipeline, which offers direct access to East Coast export facilities.

Antero's liquids focus also reduces its exposure to natural gas price fluctuations, but like all Appalachia producers it still contends with infrastructure constraints. Regulators and local authorities have strongly resisted new pipeline proposals recently, resulting in numerous delays and project cancellations. That limits the ability of producers to grow, although low-cost operators like Antero can still theoretically take share. However, Antero has been more interested in merely maintaining its output and using the surplus cash it generates to strengthen the balance sheet and fund stock repurchases. This strategy also preserves the longevity of Antero's acreage. We've previously highlighted a statistical analysis by Rystad Energy that showed Antero lacks inventory depth relative to peers (it has enough drilling opportunities to keep going for at least another 10-15 years at the current cadence, but its best acreage could run out sooner). A portion of the capital budget goes to land costs, which essentially means shoring up its inventory position, but this incremental spending also dilutes returns.

Limited takeaway capacity also hurts in-basin commodity prices when demand for egress is high. But Antero has all but eliminated this risk with firm transport contracts that guarantee shipping. So the firm essentially sells all its gas at Nymex prices and has no exposure to local basis differentials. It also lumps in some of its produced ethane with its sold natural gas, resulting in a higher heat content that justifies a further pricing premium. These benefits are partially offset by elevated marketing expenses.

Business Strategy & Outlook

The ability to generate excess returns on invested capital is a hallmark of firms with economic moats. Antero has struggled to do so consistently in the past, mainly due to a volatile commodity price environment. The firm can probably earn its cost of capital in the next few years, but the margin of safety is razor thin at midcycle prices ($3.30 per thousand cubic feet). Besides, we do not see a durable competitive advantage. The company typically reports stronger realized prices than its peers but the revenue benefit is partially offset by higher marketing costs. In addition, we note that the firm has a shorter inventory runway than several other Appalachian producers, and it is therefore likely run out of top-tier acreage sooner, as well. We assign a no-moat rating. 

Our no-moat rating also acknowledges the long-term threat of material value destruction arising from Antero's environmental, social, and governance exposures. For Antero, the most significant ESG issue is greenhouse gas emissions (both from extraction operations and downstream consumption). Greenhouse gas emissions are unavoidable for oil and natural producers. Firms can clean up their operations in the field as much as possible by avoiding unnecessary flaring and using technologies like electric fracking and carbon capture to reduce CO2 volumes being released into the atmosphere during the extraction process.

But because downstream emissions are beyond producers' control, there's really no such thing as a "clean" E&P company. Natural gas is primarily used for electric power generation and for commercial and residential heating. As consumers get more averse to fossil fuels, the reputational risk grows for producers and the probability of widespread substitution away from fossil fuels increases. We believe renewable energy will continue to gain share over fossil fuels in the next few years but at the expense of coal rather than natural gas (which is less carbon-intense than coal but does not have the intermittency issues that plague wind and solar generators). Nevertheless, there is still the potential for value-destructive regulatory intervention (think fracking restrictions or carbon taxes). These threats are not likely enough to be included in our base forecasts, but the impact is potentially material.

None

Economic Moat

Antero Resources

Antero Resources Corp. is an independent oil and natural gas company, which engages in the development, production, exploration and acquisition of natural gas. It operates through the Exploration and Production, Marketing, and Equity Method Investment in Antero Midstream Corporation. The Exploration and Production segment develops natural gas, NGLs and oil. The Marketing segment is involved in the marketing and excess firm transportation capacity gathering and processing. The company was founded by Paul M. Rady and Glen C. Warren, Jr. in June 2002 and is headquartered in Denver, CO.

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Antero Resources Corp. engages in the development, production, exploration and acquisition of natural gas. It operates through the following segments: Exploration and Production, Marketing, and Equity Method Investment in Antero Midstream. The Exploration and Production segment deals with the development and production of natural gas, NGLs, and oil. The Marketing segment refers to marketing and utilization of excess firm transportation capacity. The Equity Method Investment in Antero Midstream segment represents midstream services. The company was founded by Paul M. Rady and Glen C. Warren, Jr. in June 2002 and is headquartered in Denver, CO.

Antero Resources Corp  (NYSE:AR) stock is down 2.2% at $24.41 at last glance, and carries a 21.2% year-to-date deficit.

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Antero Resources benefits from strong demand and subdued supply growth in the natural gas market. The company has a well-performing midstream network and access to the LNG Fairway, allowing for better prices and export opportunities. Antero's commitment to efficiency and capital management positions it for future growth and cash flow generation, with the potential for substantial capital gains.

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Since the inception of the buyback plan in the first quarter of 2022, Antero Resources (AR) has repurchased 31.1 million shares for roughly $1 billion.

Why Hold Strategy is Apt for Antero Resources (AR) Stock Now

Antero Resources Corporation's recent results were in line with expectations, but the outlook for the next 12 to 18 months is much better. The energy crisis appears to have dissipated, leading to low natural gas prices and a shift away from coal. The energy transition is real but will take time, and renewables still only supply 10% of the electrical supply. However, increased demand and President Biden's economic agenda could drive a rebound in natural gas prices.

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Antero's (AR) second-quarter earnings suffer from a drop in natural gas price realization.

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Antero Resources' management expenditures, to maintain production, will benefit from the coming cyclical natural gas pricing recovery. The cost reductions and well efficiency improvements mean that new production costs are less than established production. Rig count reductions will translate into production reductions that will rebalance supply and demand.

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The headline numbers for Antero Resources (AR) give insight into how the company performed in the quarter ended June 2023, but it may be worthwhile to compare some of its key metrics to Wall Street estimates and the year-ago actuals.

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Antero Resources (AR) came out with a quarterly loss of $0.28 per share versus the Zacks Consensus Estimate of a loss of $0.27. This compares to earnings of $1.69 per share a year ago.

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Antero Midstream Partners

DENVER , July 26, 2023 /PRNewswire/ -- Antero Resources Corporation (NYSE: AR) ("Antero Resources," "Antero," or the "Company") today announced its second quarter 2023 financial and operating results. The relevant consolidated financial statements are included in Antero Resources' Quarterly Report on Form 10-Q for the quarter ended June 30, 2023.

Antero Resources Announces Second Quarter 2023 Financial and Operational Results and Increased Production Guidance

Antero Resources' Q2 results are affected by current market conditions, conditions that don't seem supportive of strong results. Antero's EBITDA for Q2 is estimated to be between $250-$300 million, lower than the $410 million generated in Q1 2023, but the company expects 45% of its total revenue to come from liquids. A major risk for Antero includes dependency on European shortages for stronger natural gas prices.

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DENVER , July 12, 2023 /PRNewswire/ -- Antero Resources (NYSE: AR) ("Antero" or the "Company") announced today that the Company plans to issue its second quarter 2023 earnings release on Wednesday, July 26, 2023 after the close of trading on the New York Stock Exchange. A conference call is scheduled on Thursday, July 27, 2023 at 9:00 am MT to discuss the financial and operational results.

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After a prolonged downtrend in natural gas prices, natural gas supply and demand dynamics suggest a sustained uptrend, creating attractive investment opportunities. Antero Resources and Tourmaline Oil Corporation are top-tier natural gas stocks with the potential for significant total returns. Factors such as increasing LNG exports, reduced resource quality, and declining rig counts support the bullish outlook for natural gas prices and the selected stocks.

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Natural gas production growth is weaker than expected, demand remains strong, and overseas prices are accelerating, making Antero Resources stock a favorable investment. The changing situation in Europe, with increased dependence on LNG imports, contributes to the bullish outlook on natural gas. Despite elevated risks and economic weakness, the risk/reward ratio for investing in natural gas, particularly Antero Resources, appears favorable.

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Antero Resources (AR) has more than 20 years of premium core drilling inventory.

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The natural gas outlook remains depressed currently. But that can rapidly change. Antero Resources Corporation's profitability is dependent upon a matrix of product pricing, whereas dry gas producers depend solely upon the pricing of natural gas.

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Antero Resources posted solid Q1 results, highlighted by a 17% increase in liquids production. The company should benefit from a potential rebound in NGL pricing as China re-opens and shipping rates fall.

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Antero Resources Corporation has seen a decrease in its net income compared to a year prior, much like the rest of the industry, too. The need for oil and natural gas remains strong, and I expect this will help fuel the share buyback program of AR for years to come.

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